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Note: Against the backdrop of political and social upheaval in Eastern Europe that surrounded the fall of the Berlin Wall, Advance Capital Services (Canada) contracted to purchase from and have delivered by Hod Impex Company Limited (Poland), over US$300,000,000 worth of food. Advance Capital Services (Buyer) said that it was purchasing the food to be shipped from Poland to Russia as part of a "humanitarian aid" project. Payment for the food delivered by Hod Impex (Seller) was to be based on LCs and bank guarantees.

It was proposed that Buyer would provide a bank guarantee from United National Republic Bank (UNRB), described in literature given to the Seller as a "relatively new on-line bank, 50% western owned backed by exterior government food credits and Russian government resources." Robert Palm was both the president of Buyer and the director of UNRB. Following additional negotiations, Seller and Buyer executed fifteen contracts for the sale and delivery of various food items. In the contracts, payment was described to be by "irrevocable, transferable, divisible, revolving letter of credit," and the buyer's bank was described as UNRB. Each contract was accompanied by an "irrevocable corporate purchase order" that confirmed Buyer's commitment to purchase the items in each contract, that payment was by way of bank guarantee, and that the buyer's bank was to be UNRB, at an address in Moscow, Russia.

Subsequently, UNRB issued a document to Seller described as a "Confirmed Bank Guaranty." The document claimed to verify a credit guarantee that had been issued to Seller through UNRB to cover an amount equal to 120% of the market value of the goods sold, identifying and guaranteeing the corporate purchase orders. This document was signed by Mr. Palm as director of UNRB. Seller also received, through a third party agent of Buyer, a financial statement of the bank's circumstances that showed UNRB had over US$188 billion dollars in assets. This document was allegedly verified by an independent auditor and was again signed by Mr. Palm as director. Seller sent an employee to Moscow to verify that UNRB existed at the address given. He was unable to locate UNRB at the Moscow address. Seller's employee then called Mr. Palm, who verbally assured him that the bank was currently in the process of registering with the Russian government, and that it would be fulfilling all of Buyer's obligations. Based on this verbal representation, Seller commenced shipments under the contracts, but was never paid and the bank was never licensed.

The first of what would be many exchanges of correspondence on the topic of non-payment began shortly after Seller made its first deliveries. In response to inquires by Seller, a telefax was sent via UNRB from a subsidiary of Buyer, purporting to be a "Confirmed Bank Guaranty," confirming that the beneficiary was Seller and that it covered the first five contracts. The document was signed by Mr. Palm as director of UNRB. Additional communications flowed over the next two months from Buyer and Mr. Palm himself attempting to assure Seller that a variety of sources were available to pay for the more than US$20 million of food that had already been delivered. These assurances included the alleged UNRB LC, a promised direct payment from Abn- Amro Bank, and an "irrevocable letter of credit of a western bank." None of these promised payments materialized, and as a result, Seller stopped further deliveries.

In an attempt to convince Seller to resume deliveries, Mr. Palm showed Seller documents from a Chinese bank: a promissory note in the amount of US$1.1 billion, payable to the bearer or holder at maturity, and a Standby LC in the amount of US$80 million per year for the next twenty years, naming Buyer as beneficiary. Mr. Palm then wrote a letter to Seller that assigned US$125 million of the funds from the promissory note and the LC to Seller. Later in the month, UNRB allegedly issued a revolving LC naming Seller as beneficiary in the amount of US$40 million per month for twelve monthly draws. The named applicant is Buyer, the document is signed by Mr. Palm. Attempts by Seller to collect on these various documents were unsuccessful. The Chinese financial institution named on the promissory note and the LC denied the documents' validity. When asked by the court what happened to this LC, Palm was unable to give a satisfying answer.

THE COURT: You mean you let it get-you let this thing get out of your hands when it's payable to the bearer?

A: We - we let a lot of things get out of our hands, but - but we did -

THE COURT: You let one billion one hundred million U.S. dollars get out of your hands and you don't know where it went?

A: No, I don't.

After the series of failed payment arrangements, Seller sued Mr. Palm and Buyer in British Columbia for fraudulent misrepresentation, aggravated, punitive, and exemplary damages, as well as reimbursement for the value of the food delivered according to the contracts with Buyer. Buyer was struck from the registers in British Columbia before the suit was filed. As a result, it lacked "the capacity to sue or be sued," therefore a stay was issued, leaving Mr. Palm as the only defendant in the proceedings. The British Columbia Supreme Court, Melvin, J., ruled that Mr. Palm was liable to Seller for food delivered to Poland in the amount of US$37,263,232.10 with interest and costs. Exemplary, aggravated, and punitive damages were denied.

In reviewing Mr. Palm's various arrangements to deliver payment to Seller, the court summarized by stating that "[i]n short, guaranties and promises to pay issued by the defendant [Buyer] or the defendant Palm fell like autumn leaves in a brisk wind with like value." According to the court's determinations, Buyer was never in a position to make good on its promises of payments, and UNRB never existed except on paper. The court stated that Mr. Palm falsely represented material facts, thereby inducing Seller to enter into the contract, and that as a result it suffered loss.

[T]he bank relied on by the [Beneficiary], and continually represented to be the [Applicant's] bank right through all of the contractual documentation into May of 1992, did not in fact exist as an operational bank. It was not in a position to issue any guaranties of payment as it was not licensed to carry out the operations of a bank. In fact, there are serious questions as to whether or not it ever existed other than in the minds of the individuals who participated in these transactions on behalf of the defendants. It is to be noted that this is a bank with allegedly U.S. $ 188 billion of assets in the fall of 1991, and nothing approximately 12 months thereafter, with no explanation as to where the U.S. $ 188 billion went, if it ever existed.

Having concluded that there was a false representation, the court noted that "the evidentiary burden shifts to the defendant to clearly show that the plaintiff was not induced by the false representation."

[JEB/fkd]

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